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1 month ago

Do You Have the Right Digital Tools to Handle the LNG Transition?

Do You Have the Right Digital Tools to Handle the LNG Transition?

 

LNG has become the fastest-growing global energy segment with significant investment in the LNG supply chain, particularly in liquefaction and storage capacity. Traders now play an essential part in bridging new and varied sources of supply and demand while managing associated risks due to plenty of arbitrage opportunities. This has led to further commoditization of the LNG sector. Liquified gas can now travel through several intermediaries or take multiple routes to reach the market, as opposed to the point-to-point distribution from the liquefaction terminal to the final consumer in the past.

The first quarter of 2022 saw a 70% growth in the LNG imports into the EU, and it is anticipated that this trend will continue, making Europe the world’s top LNG market luring shipments out of the APAC region and other areas.

With worldwide supply/demand and price volatility, supply chains have grown increasingly complex as operations have expanded. Today, more volumes are sold under short- and medium-term contracts, and destination flexibility accounts for a growing portion of LNG trading.

To adapt to the changing supply chains and business models, the LNG players must become more agile, effective, and dedicated to operational excellence. Their capacity to utilize technology and related analytics, real-time situational awareness, and proactive, intelligence-based decisions is fundamental to solving the rising challenges in LNG trading.

The ability to aggressively implement new technologies and digital tools alongside the whole LNG value chain will separate the sharks from the fish in a pond of complex gas-trading deals with numerous variables and risks

Increased Complexity of the Supply Chain

Compared to LNG, pipeline gas can be moved relatively quickly through the existing infrastructure. In contrast, LNG supply chains are much more complex. The cargo needs to be loaded and unloaded, regasified, and wait times at ports, maintenance windows, political climate, and force majeure situations during shipping all add to the complexity of the supply chain.

The possible routes for an LNG portfolio are virtually limitless. And mapping various scenarios of potential choices, then determining the most lucrative option within a set of operational restrictions and risk factors becomes crucial. LNG traders that succeed in building digital ecosystems and shared platforms managing this complexity will enjoy exponential growth and profits.

These digital systems should provide data and decision-making capabilities touching multiple variables of the supply chains like:

  • cost of obtaining LNG from different global supply points (including waterborne cargoes with a flexible destination),
  • the availability of specialized LNG carriers
  • transport expenses and charter rates
  • transport times and expected delivery windows

Now add an additional layer of complexity like price fluctuations, unexpected weather, and other risks while transporting cargo in the open sea, loading and discharge windows, and boil-off gas (BOG) in which a fraction of LNG evaporates during transport or storage. The list goes on, but this demonstrates the complexity of optimizing for straightforward delivery to a given location, which has countless potential outcomes that, in many cases, are still handled manually.

Hence, there is a great potential and need for automation and optimization-based decision support to manage the LNG fleet, liquefaction plants, and regasification terminals.

To manage the operational risk, traders need an integrated digital tool ecosystem that supports real-time decision-making. But the fancy tools would still be inefficient without the underlying data. And this is where many energy and utility companies struggle with their trading desks.

The scope and diversity of the data are quite broad, ranging from publicly available weather and pricing data to contractual commitments inside SPAs and asset-specific data. The information is available in organized and unstructured formats and updated at irregular intervals from various sources. Fast and precise data throughout the LNG supply chain becomes essential to capture value.

Scalefocus connects all these components to achieve digital transformation for traders using a holistic data-driven approach. We start with the proper data governance and models to unlock the potential of algorithmic trading in the Energy sector while also developing superior software solutions in the trading, supply-chain, investor relations & asset management.

For one of our clients, an international energy supply and trading company, we developed a scalable and fit-for-purpose technology solution that greatly enhanced their trading and risk management capabilities. The sophisticated platform for portfolio optimization and vessel nomination – the LNG Leadtime tool, ensured that the client’s IT landscape could cope with the growing business demands for LNG, replacing the inefficient Excel spreadsheets.

The digitalized funnel calculates when and where the LNG shipment will reach the buyer and what will be the quality and quantity of the LNG cargo. It also tracks the route of the LNG carrier, at which terminal it will be unloaded, and at what time. The project helped our client to thrive in the commodity matrix with access to reliable, real-time data and the technology platforms necessary to turn that data into action.

The Rise of the Short-Term Contracts

As intraday markets evolved, so did the necessity to trade as close as possible to the delivery time. Historically, sold through long-term contracts, today, over one-third of the LNG trade is conducted on the short-term market. Two factors have fueled the rise in spot and short-term contracts. First is the lack of clarity among European consumers on long-term gas use in light of the energy transition. The second factor is the inclusion of long-term LNG contracts that do not impose restrictions on end-users and permit traders to make long and short sales on spot markets.

Utility companies can now conduct automated trading around the clock with the arrival of new and more sophisticated automatic trading solutions. Scheduling systems face a challenge in adjusting to this trend as short-term trading converges to tradeable products up to “just before delivery” and becomes trading in real-time.

Unfortunately, trading LNG frequently entails an utter lack of transparency, slow access to price information, and fluctuating pricing – an inadequate mix if you want to make wise trading decisions.

“New digital tools are required that enable trading desks to pool their portfolio and trade instantly rather than negotiating each transaction. The digitalization wave in the industry should increase traders’ time efficiency and transform data into market intelligence, allowing traders to react in real-time and reduce operational risks, and also increase the efficiency in vessel scheduling, and therefore achieve higher utilization of variety of contract and assets.”

 

Hongda Jiang, LNG Deal Structuring & Portfolio at a European Energy Leader

At Scalefocus, we have a rich experience in developing automated, fast, and more accurate decision-making, cost reduction tools for the energy sector, enabling real-time viewing of bids, offers, and transactions.

With the computing power available in the cloud, we provide integrated, intelligent trading systems that enable traders to conduct much more realistic, path-dependent risk assessments and sophisticated scenario analyses. The data is digitized and made available to market participants via APIs, allowing them to make more informed decisions.

 

Dimitar Grancharov

Manager Content Team